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Doling Out Other People’s Money

A couple of years ago, Judge Harold Baer Jr. found himself with $6 million of unclaimed money from the settlement of an antitrust class-action lawsuit. The case had involved fashion models, so he decided to give the extra money to charities likely to assist them.

After interviewing a parade of applicants over two days, Judge Baer, a federal judge in New York, gave $1 million to an eating disorder program, $500,000 to a substance abuse program, and so on.

Judges all over the country have gotten into the business of doling out leftover class-action settlement money, sometimes to organizations only tangentially related to the subject of the lawsuit. Hospitals are popular, as are law schools and legal aid societies.

The practice is getting out of hand, said Samuel Issacharoff, a law professor at New York University.

“It gives rise to this unbelievable world that I was shocked to learn about, and I’m not easily shocked in litigation,” Professor Issacharoff said. “Charities hire lawyers to go lobby the judge for the extra money.”

In recent months alone, the George Washington University Law School was given more than $5 million from an antitrust settlement in a Washington case concerning chemical prices. The Illinois Institute of Technology got $5 million from a settlement in a case involving a diabetes drug in Illinois, as did a Chicago hospital. A Hasidic Jewish group, Lubavitch Chabad of Illinois, picked up $2 million from the drug settlement.

Class-action lawyers call these creative uses of settlement money “cy pres,” from the French expression “cy pres comme possible,” or “as near as possible.” They borrowed the term from the law of charitable trusts. If, say, a charity that was specified in a will no longer exists, the law sometimes allows the estate’s money to be used for a similar cause under the cy pres doctrine.

In the class-action context, though, allowing judges to choose how to spend other people’s money “is not a true judicial function and can lead to abuses,” said David F. Levi, a former federal judge who is now the dean of the Duke University School of Law. “It made me more than a little uncomfortable that groups would solicit me for consideration as recipients of cy pres awards.”

“I know,” he added, “that other judges felt that there was something unseemly about this system.”

In the case before Judge Baer, thousands of fashion models had received a settlement of almost $22 million from agencies they said had violated laws against price-fixing by adopting uniform commissions. But fewer than 5 percent of the models eligible for settlement money put in claims, perhaps because, as Judge Baer put it, models “are a notoriously peripatetic group.”

Judge Baer had four choices. He could have given the extra money back to the defendants. He could have let the government take it. He could have given those models who had made claims a little extra. Or he could, as he did, use the leftover money for programs that would indirectly help the entire class of skinny women prone to drug addiction.

In January, the federal appeals court in New York indicated that it was uncomfortable with Judge Baer’s solution, and it ordered him to take another look at his plan. While the appeals court did not order Judge Baer to give the money to actual plaintiffs, it nudged him in that direction by urging him to read a draft document from the American Law Institute, an influential group of lawyers, academics and judges.

The document proposes a simple solution. Unless the plaintiffs cannot be found or the sums involved are too trivial to bother with, class-action settlement money should go to actual plaintiffs.

“It’s their money,” said Professor Issacharoff, the main author of the draft. “I don’t care how much good you want to do. Do it with your own money, not someone else’s money.”

But, in a second decision in July, Judge Baer dug in his heels. He ordered the distribution to the charities to proceed. The alternative, he said, was to provide a windfall to the relatively few models who had made claims.

By one calculation, they would have received 116 percent of what they were owed. The antitrust laws allow the award of triple damages.

The draft principles cited by the appeals court have not been adopted by the law institute, and they were met with passionate opposition when they were presented at the institute’s annual meeting this year, Professor Issacharoff said. Lawyers and judges have grown used to controlling these pots of money, and they enjoy distributing them to favored charities, alma maters and the like.

“You’re taking money from someone who does not deserve to have it — the defendant — and you’re putting it to a public good,” said Peter F. Langrock, a Vermont lawyer who spoke with pride about using money from the settlement of an environmental class-action suit in Alaska to finance a high school science program.

The process is starting to become institutionalized, and legal services organizations that represent poor people have begun to rely on class-action settlements to finance their work. They have turned to legislatures and appeals courts to make sure judges keep the money flowing.

An Illinois law enacted in September will require that up to half of all leftover class-action settlement money be turned over to such groups. Last year, the Washington Supreme Court adopted a rule requiring that at least a quarter of leftover money be used in a similar way.

Judges are turning into grant administrators, and some of them are starting to enjoy it. Who wouldn’t?

But the new judicial role does not fit well with the old one. “It is,” Professor Issacharoff said, “an invitation to wild corruption of the judicial process.”

Online: Documents and an archive of Adam Liptak’s articles: nytimes.com/adamliptak.